Why the World Needs More Goldman Sachs

ritics have lined up against Goldman Sachs Group in the days since the U.S. Securities and Exchange Commission announced a fraud lawsuit against the Wall Street giant.

The SEC did little during the past 10 years to stop a technology bubble, Ponzi schemes and the buildup of the housing, stock market and banking crises. When federal regulators finally decided to act, they missed the mark.

Nevertheless, many see the allegations announced April 16 as an opportunity to knock Goldman down a notch from its perch atop the investment banking world. That would be a mistake which would hurt American competitiveness in the global arena.

Rather than regulate Goldman down to the average, a more rational approach would be to create an environment in the United States that rewards financial services innovation and helps other companies rise to Goldman’s level.

The world needs trailblazers at the top of the investment banking pyramid, and Goldman fills this role in a way that gives the United States an edge in global financial services. This edge creates jobs, boosts incomes and improves standards of living in the United States.

More competition at the top would generate even more of these benefits. Microsoft has Apple, Ford has General Motors and Coke has Pepsi. This competition pushes innovation and creates healthy checks and balances. But Goldman stands without peer in the aftermath of the global financial meltdown.

Bear Stearns and Lehman Brothers are gone, and Merrill Lynch has been absorbed by Bank of America. That leaves JP Morgan Chase and Morgan Stanley in the mix, but these banks generally operate today in separate categories from Goldman.

If the United States does not create a regulatory environment that encourages competition at Goldman’s level, other countries will step forward to fill this gap in a way that could shift the balance of power elsewhere.

Now is not the time for the United States to attack the reputation of its top investment bank — especially through allegations that seemingly lack merit. It should not be wrong to be a winner as long as you play by the rules.

The U.S. financial system is already weakened, and these allegations might only weaken it further, threatening a still fragile system that needs to start lending money to companies so they can hire people.

Circulating money
Reputation matters in banking. Even allegations never proved create problems for a publicly traded company like Goldman because so few people understand the complexities involved.

Goldman lives in a world of multibillion- and even trillion-dollar deals far removed from the commercial transactions that individual consumers see at their neighborhood banks.

Many who read about the SEC allegations in the media never studied finance or economics beyond an introductory course in high school. They don’t understand credit default swaps or collateralized debt obligations. But they do grasp concepts such as fraud, mismanagement and greed.

These words could stick long after Goldman clears itself in court.

People anxious to see Goldman punished for these perceived wrongs need to understand that what happens at the top of the investment banking world affects everything below — including how much people have to pay to borrow money and whether or not corporations get the funds they needs at reasonable costs so they can grow.

Goldman bankers do not deal in individual mortgages, car loans, credit card lines or small-business loans. But the institutional transactions they broker keep money flowing through the global financial system in a way that allows these things to occur.

Their job is to make financial markets function. They do not guarantee that an investor’s view of the market is the correct one.

They are part of a financial services system similar to the circulatory system in the human body. Instead of pumping blood, world banks pump about $25 trillion through the global financial body daily — a staggering figure that dwarfs the U.S. gross domestic product for an entire year.

Most people never see the circulation of this money. But they feel the effects quickly when arteries are blocked and the economy grinds to a halt.

Making markets
Understanding the SEC allegations against Goldman requires some understanding of the role investment banks play in keeping these arteries open.

In simple terms, an investment bank does not accept deposits like commercial banks. Instead, banks such as Goldman broker large-scale movement of funds between institutional buyers and sellers. Customers include other banks, large businesses and governments.

The transactions involve complex challenges that require customized and often innovative solutions. Ultimately, investment banks such as Goldman function as market makers for the specialized financial instruments they create to broker these deals.

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